AHON SA HIRAP INC Philippines

Transcription

1 EXECUTIVE SUMMARY AHON SA HIRAP INC Philippines Ahon sa Hirap (ASHI) was established in 1989 as the first Grameen replicator microfinance institution in the Philippines. In 1991 the institution was registered as an NGO. ASHI serves the low end target in the marginalized urban areas of Cavite (close to Metro Manila) and the peri-urban provinces of Rizal, Laguna and Antique. Activities are financed by local and international funds. FINAL RATING OUTLOOK RATING RATIONALE FINANCIAL ANALYSIS AND CAPITAL ADEQUACY TBD TBD To be defined Date Rating Committee : Validity : Previous Rating : To be defined 1 year if no relevant changes in operations or within the operational context occur. First Rating GOVERNANCE, RISK MANAGEMENT AND SOCIAL PERFORMANCE APPROACH To be defined Legal Form Non-governmental organization Year of inception 1989 Regulator / Supervisor na Network of reference Microfinance Council Philippines Area of intervention Urban and rural areas Financial services Credit, savings, insurance Credit methodology Group solidarity Target market Low end segment MicroFinanza Rating Srl Corso Sempione, Milan Italy Tel: info@microfinanzarating.com AHON SA HIRAP INC No.76, 8th avenue, Cubao 1109, Quezon City Manila Philippines Tel: ; Fax: mila_bunker@yahoo.com

2 ASHI Philippines August 2011 EXECUTIVE SUMMARY Main Risk Factors MicroFinanza Rating

3 ASHI Philippines August 2011 EXECUTIVE SUMMARY MicroFinanza Rating

4 ASHI Philippines August 2011 EXECUTIVE SUMMARY Head Office Areas of operations STRENGTHS Internal experience of the management team Large variety of financial services Low staff turn-over ratio Good specialization in solidarity group lending Improving sustainability level The poverty monitoring and screening tool helps reaching the poor population targeted. BoD, management and staff demonstrate a clear commitment to the social mission Relevant social information integrated in the reporting flow for a balanced decision making Restructuring options available for the clients OPPORTUNITIES Lobbing activity of the MCPI to improve the NGO MFI legal framework Possible technical assistance from Grameen Credit Agricole on risk based business planning Room for potential growth in agriculture sector Participation to a first credit bureau pilot in the Panay island MicroFinanza Rating

5 ASHI Philippines August 2011 EXECUTIVE SUMMARY Benchmarking 1 1 The source of the client poverty rate benchmark is the MicroFinanza Rating Social Rating database. All other figures of peer groups are referred to the MicroBanking Bulletin (MBB) and to the Microfinance Information Exchange (MIX) as of December The ratios of the rated MFI indicated here do not fully correspond to the ratios presented in the report as they are calculated according to the MBB methodology. The MBB adjusts the financial data to produce a common treatment for the effect of: a) inflation, b) subsidies, and c) loan loss provisioning and write-off (see MBB, Appendix I: Notes to Adjustments and Statistical Issues). MicroFinanza Rating

6 ASHI Philippines August 2011 Chapter 1 1. External Context and MFI positioning 1.1 Country Risk: Political and Socioeconomic Context Last presidential elections held in May 2010 were won by Benigno Nonoy Aquino III, whose coming into power after years characterized by poor transparency and alleged corruption in economic and political affairs under ex President Arroyo was welcomed as the beginning of a new political era characterized by transparency and accountability. Fight against corruption is among the top priorities of the new administration, together with poverty reduction and balancing of the state budget, which has been in deficit over the past 12 years with a public debt to GDP ratio standing at 57%, one of the highest in Asia. Internal security issues in the Autonomous Region in Muslim Mindanao (ARMM) remain unsolved. During the period , the Philippines economy posted steady growth with an average 5% GDP growth. The 2008 global financial crisis and rapidly rising inflation which climbed to 8.9% in 2008 led to a significant slowdown. GDP growth rate in 2008 and 2009 was respectively at 3.7% and 1.10%, the slowest pace since the Asian financial crisis in In 2010 real GDP growth stood at 6.2%, whereas it decelerated to 3.4% year on year in the second quarter of 2011 from 4.9% in the first. On the demand side, the economy has been driven by private consumption - sustained by the significant inflow of remittances (accounting for 4% of the GDP) - which contributes to two-thirds of GDP. Consumption expanded by 4.9% year on year, maintaining high levels throughout the last quarters, and contributed 3.4 percentage points to growth. On the supply side the main engine was industry, thanks to robust activity by the domestically oriented sectors. The services sector expanded by 5% year on year adding 2.8 percentage points to growth. Inflation averaged 4.3% in the second quarter Upward trend was mainly due both to adverse weather conditions, which increased prices of fish and fruits and vegetables and to higher prices of fuel, transportation and communication services. The World Bank forecasts 5.0 and 5.4 percent growth for 2011 and 2012 and an average inflation rate of 4.8 and 4.5 percent respectively 2. As growth returns and stabilizes, the challenge is to ensure that everybody can benefit from it. In fact, from 2008 to 2009 poverty has increased significantly, both in terms of the number of poor people falling into poverty (i.e. an additional 3.4 million people) and in terms of percentage of the population falling below the poverty line (from 24.9 to 26.5 percent). Besides, the labor market remains strongly affected by at least one quarter of the work force either underemployed or unemployed. 1.2 Regulatory Risk and Tax and Supervision Compliance Since the adoption of the National Strategy for Microfinance in 1997, the government has been active in promoting an enabling and conducive regulatory and policy framework for microfinance activity. In 2000, the Bangko Sentral ng Pilipinas (BSP, the Central Bank) was mandated by the General Banking Law to recognized microfinance as a legitimate banking activity and to set the provisions for the regulation of microfinance operations within banks and other regulated institutions. The BSP defines microcredit as loans up to Php 150,000 (US$ 3,376) cash-flow based, shortterm, and non-collateralized. However, BSP s regulations only apply to rural, thrift and 2 World Bank, Philippines Quaterly Update, June MicroFinanza Rating 1

7 ASHI Philippines August 2011 Chapter 1 cooperative banks, which make up about 20% of the sector, whereas the bulk of the sector is not regulated. Microfinance NGOs are not subject to any prudential regulation and just have to register with the Securities and Exchange Commission (SEC) to which they disclose that they are involved in microfinance activities. Selfregulation is being promoted by the Microfinance Council of the Philippines (MCPI), even though common rules have not agreed so far. The MFI NGOs remain unregulated with some of them acting as financial intermediary and thus exposing savers. ASHI however plays a little role in savings intermediation keeping liquid compulsory and voluntary savings. MFI NGOs including ASHI are nowadays exposed to unclear fiscal requirements which might be soon introduced (i.e. different proposals are discussed including corporate income taxation as well as tax on gross revenue). MFI NGOs through the MCPI is actively lobbying the Tax authority to maintain the current tax exemption regime for the MFI NGOs. The Cooperative Development Authority (CDA) is the designated regulatory authority for cooperative involved in credit and savings operations. In November 2008, an amendment to the Cooperative Code was passed to develop a clear regulatory framework for cooperatives providing financial services. 1.3 Industry Risk: Financial System and Microfinance Sector The Philippines microfinance sector is potentially one of the largest in Asia. Despite a consistent growth, the sector only covers one-third of the estimated one-third population living under the poverty line. The major providers of microfinance in the Philippines are rural banks, thrift banks, NGOs and cooperatives. As of March 2011 there are 746 banking institutions (773 as of June 2010), including 38 universal and commercial banks, 73 thrift banks, 40 cooperative banks and 595 rural banks. As for the NGO sector, there are currently about 300 MFI NGOs, about 30 of which are members of MCPI. On the other hand, cooperatives are many in number, although their outreach is limited. According to the CDA, as of June 2010 there are 1,444 credit cooperatives and more than 13,000 multipurpose cooperatives, about 80 percent of which are engaged in credit and savings operations. Although there is still large unmet demand, competition in the sector is high, also due to the territorial concentration of microfinance providers. Multiple borrowings is becoming a common phenomenon, possibly resulting in credit pollution. The opportunities to share information in the market are limited, also due to the lack of a Credit Bureau covering microfinance borrowers. A recent pilot test of a credit bureau system in Panay Island 3 has been launched and results are expected soon. Overall, the information exchange in the sector is poor, with only some aggregate information on the rural banking sector available. Philippine MFIs are grouped together through various networks including the Microfinance Council of the Philippines, Inc. (MCPI), the Alliance of Philippine Partners in Enterprise Development (APPEND), the National Confederation of Cooperatives (NATCCO), the Philippine Network of Rural Development Institutes (PHILNET) and the Rural Bankers Association of the Philippines (RBAP) as well as regional networks such as the Mindanao Microfinance Council. 3 Participating MFIs are CARD MRI, Ahon sa Hirap, Inc. Foundation (ASHI), Taytay sa Kauswagan, Incorporated (TSKI), ASA Philippines Foundation, and LifeBank Foundation MicroFinanza Rating 2

8 ASHI Philippines August 2011 Chapter 3 2. Mission, Governance and Strategy 2.1 Institutional mission ASHI s mission is to inspire the marginalized women and their families to discover their God- given dignity and enable them to rise above all forms of poverty and respond to social and environmental concerns. To create an environment that enhances empowerment of women and their families. To deliver excellent professional service with a team spirit. To integrate value formation living out the ASHI core values of Integrity, Passion, Human Dignity, Excellence & Solidarity. ASHI mission is complete, though relatively lengthy in its formulation. The target population is defined as the lower 50% below the poverty line. 2.2 Governance ASHI governance is still quite weak, but it shows a positive trend. Being an NGO, ASHI does not rely on shareholders and the accountability is partly affected by the President s charismatic role. The Board of Directors (BoD) membership is regularly rotated, the meeting frequency is adequate and the minutes are regularly produced. However, a BoD manual is not available, committees are not established and CEO performance assessment criteria are not formalized. The Directors financial analysis skills are currently limited and the reporting to the BoD lacks a complete set of financial performance and risk indicators as well as a budget control tool, hampering the strategic guidance and supervision. The concentration of the BoD president and CEO functions in the same person represents a conflict of interest. Some governance inefficiencies are generated by the direct reporting of the internal auditor to the BoD president and by the un-balanced interaction with the other BoD members, who have a lower access to information. Such risk can be mitigated in the medium term thanks to the succession plan resolved by the BoD in June 2011, which creates a separate CEO position to be filled in 2012 and gradually re-focuses the BoD president s role into governance. The BoD demonstrates a clear commitment to the social mission, as formally required by the act of registration of ASHI. Some members were exposed to the topic of client protection, even if the BoD has not yet received complete social performance management trainings. The maximum share of entrepreneur portfolio for up-grading clients has been set at 10% to keep the poverty outreach orientation. The reporting to the BoD includes some social information. The reasonable participation of the members representatives in the BoD discussion contributes to take client interest into MicroFinanza Rating 3

9 ASHI Philippines August 2011 Chapter Management and Decision Making account in decision making. The top management remuneration is moderate. The gaps between the top management (President) and DOs salary (11 times), and between the top three and the bottom three salaries (5.5 times) are acceptable. The business relationships 4 between ASHI and INSOL, a consulting company lead by the ASHI President s husband, generate some potential conflict of interest. ASHI management team relies on a long experience in the organization, while the risk and financial analysis skills show some room for improvement. The President shows a very high commitment to the organization. However, she still centralizes the decision making of the financial and operational functions, entailing a key person risk which could be mitigated thanks to the new CEO position. The decision making is facilitated by a good communication, frequent meetings and a participatory approach. However, the reporting flow is fragmented and not fully streamlined, lacking a complete set of indicators to regularly monitor the performance and risk profile of the operations. The financial and social aspects are well balanced in the information flow used for decision making. The management shows commitment to the mission and concern for the responsible treatment of clients and the risk of over-indebtedness 5. The social reporting is adequate and includes the client over-indebtedness, client retention and attendance, the poverty rates, the delayed loan release and the extended meetings. 2.4 Strategic and operational plan The risk management is not adequately covered in the Business Plan (BP), potentially affecting ASHI long term sustainability. The technical assistance offered by Grameen Credit Agricole on the risk based management approach to business planning could contribute to addressing the current shortcomings in the strategy. The main strategic axes of the BP are the growth and the outreach to the areas and segments with low microfinance access. The challenges faced by the expansion strategy are the moderate staff productivity and the high competition coupled with the no cross-financing policy. These are reflected in the systematic gap between the achieved and target growth, which is regularly monitored by the management. Even if a decision has not been formalized yet, the BoD may consider transforming the NGO into a cooperative or a different charter type in the medium-long term if required by the regulation or in order to increase the financial intermediation. ASHI s overall strategy presents a good balance between social and financial concerns: the sustainability and the economies of scale are considered as a necessary means to achieve the mission and a long term condition for poverty outreach. The BP formalizes the objectives of enlarging the outreach to the bottom 50% women, improving the products adaptation, practicing corporate social responsibility and empowering the clients. The social objectives are also translated into specific operational targets 6. The client targeting tools and the product design, the mission dissemination and the social performance monitoring system confirm the strategy alignment to the mission. The financial projections are not updated, as they do not fully reflect the past years performance and the recent downward revision of the growth target in the number of clients (from 90,000 to 50,000 by 2015). Some room for improvement is observed in the planning capacity: the optimistic assumptions on the staff productivity, operating cost, funding cost, profitability and sustainability do not provide a sound base for strategic decision making. A multiple growth scenario analysis is not yet available. 4 INSOL provides training to ASHI staff and administers ASHI entrepreneur portfolio. 5 A SMART self-assessment was performed in 2011, reporting some partial findings. 6 E.g.: retention rate>98%; priority expansion to hard to reach areas; strengthen the policies of no cross-indebtedness and loan utilization check; maintain an ethical staff behavior; advocate solid waste management; develop gender responsive programs. MicroFinanza Rating 4

10 ASHI Philippines August 2011 Chapter Market Positioning and Franchise Value ASHI is one of the most active MFI NGOs within the Filipino microfinance practitioners. With a network of 22 branches, the institution focuses its operations on Rizal and Laguna two region close to the National Capital Region (NCR) Panay Island (Antique region) and Cavite. The areas of operations are characterized by a relative high competition given the presence of different players, namely rural banks, MFI NGOs (like CARD, TSKI, TSPI, PAGASA, ASA Philippines) and cooperative. The institution has identified a clear market niche, targeted through a good screening process, even if the MFIs often overlap in the same market segment. Despite the lower franchise value than CARD, ASHI relies on an overall loyal client base. Compared to the top MFIs, ASHI expanded less rapidly in the number of clients. The marketing front line and the lower visibility of ASHI branch network compared to other peer competitors represent some areas for improvement given the strong competition. ASHI s main competitive advantages are: Flexible loans and restoration system 7 for under-performing centres; Education, house repair and emergency loans loans; Micro-insurance products also for clients beyond 65 years old; Credit delivery system recently enhanced with the ATM system ASHI s main competitive disadvantages are: High interest rates compared to the top MFIs and rural banks engaged in microfinance; Lengthy meetings at credit group level. 7 Under-performing centers: low number of active members, default of inactive members, preventing the access to new loans. Restoration process: inactive members with over-due loans are encouraged to attend the meetings under a reviewed repayment agreement, including a grace period (the original loan contract remains un-changed), to increase the share of active members. If the negotiation with the inactive members is not successful or the member permanently moved, she is expelled by the center membership and the over-due loan -exceeding the former member savings- is paid by the group or center (borrow a center loan to cover the over-due is optional). MicroFinanza Rating 5

11 ASHI Philippines August 2011 Chapter 3 3. Organization and Operations 3.1 Organization and Structure Effective accountability levels are not yet fully defined in the organizational structure: the operations and the HR management functions are scattered among different departments, hampering clear and effective responsibility centres. In particular, the credit functions are split between the departments of Grameen operations, Social protection, Agriculture and Housing 8, and INSOL -managing ASHI microenterprise portfolio-, without an intermediate accountability level before the CEO. The risk is exacerbated by the vacant CEO position. The training is not fully coordinated by the HR department, with separate training responsibilities in the departments of Grameen Operations and finance, and part of the staff training externalized to INSOL. The lack of a more frequent coordination and horizontal decision making mechanism between the Grameen operations, the social protection (insurance) and the Members desk 9 department hampers the smooth integration of activities and the effective use of the market research information. The Grameen operations department 10 is adequately structured, with the 22 branches grouped under the supervision of 5 areas, reporting to the department head. 3.2 Human Resources (HR) and Staff Policy The total number of staff has registered a moderate growth in the last years and it is equal to 151 as of June The staff allocation ratio has improved significantly in 2010 and stands at a very good level (58%) as of June The gender balance is good, with females over-represented at BoD, management and staff level. The staff turn-over has been historically low, decreasing to extremely low levels in the past three periods, down to 1.3% as of June The staff turn-over ratio is regularly monitored and it is concentrated in the administrative staff and loan officer positions, mainly linked to the poor compliance to the policies and some fraudulent behaviours. An HR department is in place, including a dedicated training unit; a complete HR manual has recently been approved by the BoD. 8 In charge of in house and externalized insurance services, agriculture loan pilot in Antique and house building loan programs. 9 In charge of the monitoring of the client satisfaction, inactive and exit clients, conduction of the group recognition tests prior to loan disbursement, maintenance of clients records and product development (planned). 10 The technical research and Technical assistance evaluations are carried out by interns and not permanent positions. MicroFinanza Rating 6

12 ASHI Philippines August 2011 Chapter 3 The labour climate is overall positive thanks to the acceptable communication and participation, as well as the high social motivation and commitment of the staff. Staff feedback was formally collected as part of the HR manual drafting process, while a complete staff satisfaction survey and a market salary level study are yet to be realized. The empowerment of the heads of department is currently limited, resulting from the partial delegation of strategy, planning and management responsibilities. The professionalization process of the heads of department is still quite slow due to the focus on daily operations and the lack of strategic training and coaching tailored to the institutional development. The personnel compensation is overall acceptable. The contract form and the additional benefits are adequate, including staff loans and health insurance; the mandatory saving scheme seems to be accepted by the staff. The salary scale is quite transparent and overall fair. The salary increase in 2010 and the first annual bonus recognized in 2011 show a positive trend. However, the salary does not seem to be in line with the roles of some heads of departments, whose average salary is just two times higher than the DO salary. No staff incentive scheme is currently in place. The HR department skills are not fully adequate to manage the strategic HR development. The staff performance appraisal is acceptable, even if the process is not fully streamlined. Internal career opportunities are available, while formalized carrier and succession plans are not yet in place. While the induction and refreshments are adequate, the overall training effectiveness is hampered by the limited external exposure, the missing link with the individual staff performance appraisal and the insufficient focus on the core operations. The staff selection, induction and performance appraisal are globally well aligned to the mission. This, together with the strong social leadership of the President, is reflected in the good mission dissemination and social commitment of the staff. 3.3 Risk Management, Internal Control and Internal Audit ASHI risk management framework is still weak: the governance and management skills are currently limited, a dedicated committee is not in place and a system for the identification, management and monitoring of the risks is not yet available. The internal control systems are not effective and do not adequately support the current decentralization level. The formalization of processes and procedures is partial. The lack of complete operations (including PPI) and finance manuals in the branches contributes to some compliance gaps. The segregation of duties is rather poor, with the Development Officer in charge of loan disbursement and repayment, as well as data input in the MIS. The head office cashier and bank reconciliation functions partly overlap. The hierarchic controls and the cross-checking of the performance ratios are not efficient due to the limited reliability of the information flow and the lack of clearly defined responsibility centres (see 3.1). The dual controls are not sufficient considering the risks entailed by the cash handling. The recent introduction of the HR and audit manual, the on-going compilation of a comprehensive operations manual and the process flow mapping activity show a positive trend. ASHI is exposed to an operation risk, including fraud, due to the cash handling, the internal control shortcomings and the poor MIS (see 3.4). The cash handling risk is MicroFinanza Rating 7

13 ASHI Philippines August 2011 Chapter 3 exacerbated by the lack of a temporary numbered receipt signed by the DO and by the clients, as an additional daily support document for the cash control performed in the branches. Some fraud cases have been detected in the recent years related to the loan repayment data falsification by some development officers, who were subsequently dismissed (about US$24,000 loss in 2011). The findings of the audit activity carried out so far include the late issuance of receipts, negative balances in clients voluntary savings, client passbooks not up-dated and inaccuracies in bookkeeping. The creation of the audit unit in 2011 represents a very important step forward. The audit independence is currently hampered by the overlap between the President and the CEO roles, as well as the BoD reporting limited to the audit findings considered to be more relevant to the governance. The Internal Audit function is currently under development: the operations and portfolio audit is still insufficient and the client visits process presents room for improvement in terms of coverage and sampling. Even if a comprehensive system for the reputation risk management is not formalized, the client poverty measurement system (PPI, see 3.4) is used for targeting and for outreach monitoring, constituting a tool to manage the risk of mission drift. Clearer change and impact results are planned to be obtained in the coming years. The targeting criteria do not appear fully consistent with the target population defined: the individuals with 37% likelihood of being below the national poverty line are identified as high and medium potential, while the target population defined in the BP is the lower 50% below the poverty line. The implementation of the targeting tool is flexible, with exceptions allowed and 54% of the clients resulting in the low potential category. The Audit function validates the client poverty data (5% of PPI questionnaires) and plans to include some aspects of client protection. 3.4 Information Technology (IT) and Management Information System (MIS) 3.5 Supervision, External Audit and Accounting Policies The information and technology unit is currently supported by an external consultant for the development of a new MIS, which is expected to start running in The current MIS is weak. The accounting transactions are still manually recorded. The information produced by the current in-house built loan tracking system is unreliable due to some bugs, the scattered encoding function and the limited security, entailing the risk of errors and manipulation. The loan tracking and the accounting data present some inaccuracies and mismatches. The loan tracking reporting is not adequate for decision making. The new system effectiveness would result affected without a comprehensive audit of the data prior to the migration. The branches are not connected and the branch databases are consolidated monthly. The accounting books are subject to a relevant security risk, while the loan tracking back-up are not fully adequate in terms of storage procedure. The availability of information on the client profile is good, including relevant socioeconomic data, while the collection of data on the change in clients lives is on-going. The Progress out of Poverty Index (PPI) was introduced in 2009 for all clients at each loan disbursement. The first poverty incidence analysis was produced in 2011 with the support of the Grameen Foundation. Maintaining the previous monitoring system (means test) and replicating the PPI every 6 months on average does not appear fully cost-effective. The GRI reporting, supported by TRIAS, is currently on-going. The accounting practices are not fully in line with the International Accounting Standards. Due to the shortcomings in the control and management, the in-house insurance liability and some client savings balances show negative balances in some periods. The revenue of the salamat 11 mandatory fee is registered as a donation instead of revenue from portfolio.the loan loss provision is calculated quarterly and it is not based on portfolio ageing data; a formal loan write-off policy is not in place and the first write-off may be considered by the BoD at the end of The passive interest accrual and the foreign currency gain/loss are registered only at the moment 11 Emergency loans can be borrowed (34%-70% effective interest rate) for the equivalent of the Salamat amount paid by the group. MicroFinanza Rating 8

14 ASHI Philippines August 2011 Chapter 3 of transaction or at year end. No sustainability analysis has been conducted so far on the life in-house insurance, which appears to have cumulated some losses 12 in the period 2005 to 2009, before the externalization of the majority of the insurance activities. Without allocating the HQ income and expenses, the branches are not yet fully recognized as profit centres. The decentralized manual accounting generates some discrepancies in the branches accounting practices, as detected by the internal audit. ASHI financial statements have been regularly audited by the local firm AMYU & Associates, who has issued unqualified opinions. The external auditor added value is rather limited in terms of providing a clearer financial statements reclassification. Despite the possibility for the microfinance NGO to be subject to a new fiscal regime (see 1.3), ASHI has not created yet a reserve to cover the risk of being called to pay revenue taxes for a retroactive period of 5 years. 12 The cumulated negative fund of 670,000PHP was offset with clients contributions from the trust fund. MicroFinanza Rating 9

15 ASHI Philippines August 2011 Chapter 4 4. Client Protection 4.1 Appropriate product design and delivery 4.2 Prevention of Over-indebtedness ASHI offers credit, saving and insurance services; credit products include: general, education, house repair, market day and recovery loans (see Annex 5). ASHI has a proven innovation capacity and a large variety of financial services, including loans for business, education, house repair and emergency, saving and insurance schemes. An agriculture loan pilot project is currently going on in the Antique province. However, the organizational capacity (see 3) is not fully adequate to manage such complex product diversification. The education, house repair and emergency loans, available for clients with a good credit history, are highly valued by the clients, even if there is room for improvement in the clarity of the information provided and the compliance with the eligibility policy. The loan product design is reasonably appropriate to the main client s needs. The products are accessible to the poor targeted population, thanks to the small minimum size of the transactions, the solidarity guarantee and the delivery system. The service quality monitoring system is good, thanks to the focus group discussions with clients and the reporting activities carried out by the Member desk department. The main strengths of ASHI credit products are the accessibility, the delivery system recently enhanced with the ATM system, the repayment frequency and term, as well as the flexible choice of the loan size and term within the same group. The introduction of the larger individual enterprise loan meets the higher financial needs of a share of up-grading clients. No interest reductions apply to pre-payments. The loan approval process is overall acceptable in terms of decentralization and rapidity (2 weeks on average), comparable to other group methodologies. Some delays are registered for a small share of clients (<5%), including emergency loans and particularly affecting the centres with incomplete and late members, where the flexibility conditions are not uniformly applied. The lengthy meetings (see 4.5) and the high number of additional activities under the responsibility of the DO 13 could negatively affect the service quality. Even though ASHI is not licences to collect savings, both mandatory and voluntary saving services are available. The lack of regulation affects the saving security, exposing the clients to the risk of non-prudential management and fraud. This is partly mitigated by ASHI policy to keep the savings liquid. Some pressure exists to off-set the group s default with personal savings, hampering the saving culture. The life and health insurance design is overall appropriate, providing a fair value to the clients and a reasonable coverage (internally extended to clients over 65 years). The agreement with the provider Microensure represents a good externalization strategy even if the mandatory nature of all its components (life, health and calamity) may not match all the clients preferences. Specific audits are not yet available, limiting the insurance compliance monitoring and the validity verification in the field. Non-financial services are offered under the form of mandatory pre-credit trainings, whose cost-benefit is not perceived as very interesting by the majority of the clients. ASHI clients are exposed to the risk of over-indebtedness. The management is aware of the client over-indebtedness risk and has defined it internally 14. The management and BoD quarterly monitor the number of over-indebted clients since the end of 2010, even if the risk monitoring is hampered by the partial reliability of the portfolio at risk and the lack of internal default tracking. The number of cross-indebtedness borrowers measured by ASHI (6%) does not appear fully consistent with the high average number of additional loans of cross-indebted clients (4) and with the high competition in the 13 Mandatory pre-credit training, double tool for social data collection at each loan cycle, MIS data entry. 14 Clients with loans from other sources and clients with a total debt amount from all the ASHI loans higher than 1,617 US$. MicroFinanza Rating 10

16 ASHI Philippines August 2011 Chapter 4 urban areas, possibly reflecting the difficulty in validating the information. The repayment capacity analysis is rather poor, lacking a cash-flow analysis 15 for all products except the micro-enterprise, including rescheduling and refinancing. The credit policy prohibiting cross-indebtedness is formalized and well disseminated among the staff and the clients 16, even if its implementation is hampered by the lack of an effective credit bureau and the limited information exchange with the competitors. The audit activities, including the verification of cross-indebtedness, are not yet fully effective (see 3.3). The high relevance of the portfolio quality in the staff targets does not encourage aggressive selling practices. The loan denomination in national currency does not expose clients to the currency exchange rate risk. 4.3 Transparency The transparency on the services is moderate. Newly recruited DOs are exposed to the branch staff pre-credit explanations to the clients, even if the induction does not rely on a specific session on the effective communication with the vulnerable clients. The payment made by the clients includes an excessive number of components 17 : several fees and mandatory payments are added to the flat interest on loans, producing a complex cost structure. This contributes to a low transparency of the services, exacerbated by the poor written information provided to the clients. The written information, in local language, is organized in 6 types of passbook, without a clear repayment schedule reporting the complete breakdown of the client payments. No written information is available on the effective interest rate and on the total amount of cost, including the mandatory fees and the insurance fee. The savings and insurance conditions are not currently available in a written form, but some information on the insurance coverage and basic eligibility criteria will be provided starting from sept-11. The disclosure benefit of the extensive mandatory pre-credit training and re-training are largely counter-balanced by the complexity of the conditions, resulting in a moderate client awareness of the instalment components, the insurance conditions and the refundable versus non-refundable nature of the various contributions. A low transparency is observed in the 5% Salamat fee, an upfront fee which is part of ASHI revenue and is described to the clients as a contribution to the clients Salamat fund 18 ; the unclear communication generates some wrong expectations about the fee refundability. Receipts are provided to the clients for the total amount of center payment, though with delay in some cases. The clients passbooks are not always up-dated and are sometimes kept by the DOs, hampering clients access to accurate information on their accounts. The recently suspended TPP housing program (see 5.1) has not always been supported by sufficient information. 4.4 Responsible Pricing The price charged to the clients shows some room for improvement. ASHI average cost is overall in line with the national competitors, while it is higher than the regional benchmark (see page 5). ASHI portfolio yield remained quite constant over the past years and the future pricing strategy has not been fully defined yet. The cost varies significantly according to the loan size and maturity (APR equal 53% to 118% for the general loan): the high effective interest rate resulting from some up-front costs in the initial loan cycles (APR 103%-118%) is not considered fully justified. The effective interest rate is increased as a consequence of financing the up-front fees. On one hand the low loan size, the provision of saving and insurance services as well as the share of rural 15 The cash flow analysis was discontinued in consideration of the high DO workload. 16 One of the rules reported on the clients passbooks is about limiting the loan to the amount that borrowers can repay. 17 Principle, interest, 4 mandatory up-front fees (1 per cycle, 1 per training/re-training, 1 at beginning of membership, 1 per year to renew membership), 2 mandatory insurance fees, 1 mandatory saving, 2 voluntary group fees, 4 voluntary saving. 18 Clients can borrow group fund loan amounts (34%-70% APR) up to the limit defined by the center total Salamat fees paid. MicroFinanza Rating 11

17 ASHI Philippines August 2011 Chapter Fair and respectful treatment of clients 4.6 Privacy of client data operations justify higher costs. On the other hand the moderate productivity and the process bottlenecks are partly reflected in a higher cost to the clients and in a lower staff remuneration. ASHI unadjusted returns have been reasonable in the past years and have been reinvested for the NGO growth. A code of ethics for the staff, specifying the acceptable and unacceptable behaviour towards the clients, has not been formalized yet. Some episodes of DO impolite behaviour were detected by the members desk and the fraud cases detected were sanctioned with the staff dismissal. The staff performance assessment does not specifically cover the staff ethical conduct. Despite the reinforced prohibition by policy of lengthy centre meetings for late loan collections, such cases seem to persist 19 (estimated 10% of the total). The debt collection procedures are not yet formalized, hampering the guidance on acceptable collection practices. The staff training is mainly based on the branch practice and does not systematically address delinquency management, which is covered with internal workshops in the branches experiencing some collection difficulties. The pre-credit client training extensively covers the solidarity guarantee mechanism, while formal guidelines for the internal recovery are not provided to the centers and internal debt collection control systems are not in place. The solidarity guarantee is partly weakened by the lack of a policy on the maximum loan size difference within the same group and in groups with frequent internal default, partly due to the targeting of informal settlements. However, restructuring and restoration options (see 2.5) are available to the clients experiencing serious difficulties. ASHI does not engage in legal actions for the confiscation of the defaulters assets. A written privacy policy on the gathering, processing, use and distribution of client information is not in place except for the PPI data. The MIS is not fully adequate to protect the client privacy. The privacy of client data is not covered as an explicit topic during staff training nor included in the written material provided to the clients. 4.7 Mechanisms for complaint resolution The current grievance system is well communicated to the clients and covered during the pre-credit training, but its effectiveness is limited by the DO representing the only individual channel. A complaint resolution policy detailing the time and process is not yet in place. The members regional consultations periodically held with the BoD client representatives act as a collective complaints collection system and are used to inform the products development. 19 While the targets per se do not push to an un-respectful conduct, the strong internal leadership and moral sanctioning of poor portfolio quality results seem to contribute in some cases to unacceptable staff practices. MicroFinanza Rating 12

18 ASHI Philippines August 2011 Chapter 5 5. Assets Structure and Quality 5.1 Assets Structure ASHI s concentration of resources in the core business is acceptable, with net portfolio over total assets standing just above 50% as of June The asset productivity is mainly limited by a share of other assets represented by the land acquired within the Tulong Pabahay Program (TPP) 20, whose use is at the moment frozen due to external factors. The value of the Land is 40% of total equity, representing a concentration risk. The level of liquid assets 21 (on average 23% for the last 12 months) is quite high and partially explained by the fact that mandatory savings are not used for on-lending, in line with ASHI legal status. Besides, the institution has to maintain a certain liquidity level with Allied Bank for carrying out transactions through ATM services with borrowers % 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Assets structure - Trends (%) 20.0% 19.3% 15.3% 14.6% 4.5% 4.4% 3.9% 3.1% 60.7% 54.9% 57.3% 53.2% 14.8% 21.4% 23.5% 29.1% Dec08 Dec09 Dec10 Jun11 Cash and Banks Net Portfolio Net Fixed Assets Other Assets 5.2 Portfolio Structure and outreach ASHI has reached a medium size portfolio (USD 5.7 M as of June 2011), experiencing a constant yearly growth ranging between 22%-24% during the last three years. Growth since the very beginning has been moderate, in line with the systems and processes development. ASHI portfolio does not show any particular seasonality affecting the assets productivity, even though loan releases regularly decreased in the last quarter of the year. The number of clients stands at 23,031 as of June 2011, registering a double digit growth since 2010, even if slower than the portfolio growth. Likewise, the growth in the number of active loans shows a higher performance (closer to the portfolio growth), reflecting an increase in the parallel loans. The parallel loans 22 are likely to have a positive impact on the client loyalty. The client drop-out ratio is low (7.6% during the last period of analysis), even if it could be under-estimated as a result of the inclusion of the clients with a savings balance only. Although a consolidated ratio is not regularly calculated, ASHI keeps track of the exit reasons. The rigidity on loan release in groups with inactive clients might create some clients drop-out domino effect. According to the institution information, the client exits are concentrated after the third cycle and are mainly due to the loan conditions (including joint liability) which do not always meet the clients needs evolution. 20 TPP is an housing program initiated by ASHI after having purchased a lot of land. Due to delays in the construction permission the houses have not been completed yet and the land not transferred to the clients who in the meanwhile have borrowed the needed cash for acquiring the house and property. 21 Part of liquid assets is deposited in 30 days saving account bearing 6% p.a. 22 Incentive loans: education, house repair and emergency loans. MicroFinanza Rating 13

19 ASHI Philippines August 2011 Chapter 5 The institution s target to serve the low-end market segment of women population is adequately achieved. Though slightly increasing, the average disbursed loan size remains at a low level (USD 294 in the last period of analysis) indicating a good outreach in depth (average disbursed loan size on GDP per capita stands at 14% over the periods of analysis). According to ASHI poverty measurement system 23, the institution has a good outreach in depth in absolute terms with 37% of the new clients living below the national poverty line (the Pilipino population below poverty line stands at 31.7% 24 ). On average, the percentage of ASHI new clients for each area of operations - living below the NPL is higher than that registered at provincial level. Compared to the target defined by ASHI 50% below than the poverty line the institution is not fully aligned, even though the key terms definition and the objectives needs to be improved. Over the last years the product composition has remained unchanged with a slight increase in the microenterprise loans. These loans are given in collaboration with INSOL which shares with ASHI the income generated, even though the credit risk distribution between the two companies need to be better formalized. General loans represent the bulk of portfolio, while the education, market and recovery loans are given as incentive after clients proved to have good credit history with General loans. Group fund loans represent an alternative source of funds for emergency purpose within the groups. The trend of such a product has been stable over the last three years, with a more relevant increase in 2010 after the Ondoy typhoon. Loans to staff are composed of micro loans 25 (included in the gross portfolio) and also loans released to the personnel (for a total amount of USD 42, as of June 2011) out of internal funds accumulated among the staff. Agriculture and housing rebuilding loans) are centralized at HQ being respectively pilot and special projects. In terms of geographic coverage, the institution operates in the two closest provinces 23 ASHI uses the Progress out of Poverty Index (PPI). Figures are related to the period January December % of population below national poverty line derived from 32.9% (2006) and used internally by ASHI. 25 Micro-loans to staff are given at 13% based on fund raised through People Credit Finance Corporation (at 11%) for the specific purpose to serve the staff needs. 26 Loans no-interest bearing given to employee for educational purposes and loans interest bearing for housing purpose (in this case the i.r. is directly accrued to the fund). MicroFinanza Rating 14

20 ASHI Philippines August 2011 Chapter 5 to the capital (Laguna and Rizal which account respectively 17% and 41% of total active loans) and in 1 province in Panay Island (23.4% of total active loans). Overall, urban areas (75% of the total portfolio) which also count on some cities within Metro Manila - are the most served, with a portfolio targeted mainly to trade sector through the general loan product (62.7% of the total portfolio). However, a precise analysis on the portfolio breakdown by sector cannot be undertaken due to the lack of data. In terms of depth of geographical outreach, ASHI mainly operates in provinces characterized by a lower poverty incidence than the national level (Rizal, Laguna and Cavite account for 76.6% of the number of loans), while Aklan and Antique provinces present a greater poverty incidence than the national level (respectively with 39.3% and 46.1% compared to 26.5% 27 ). However, the above mentioned poverty results at individual level demonstrate a good depth of outreach. Overall, the concentration in Rizal area moderately exposes the institution to competitive pressures as the area is already characterized by several players. The market penetration and the intended target (including the breadth of outreach) can be undermined also considering that the other areas are characterized by a significant degree of credit pollution. On the other hand, the institution has demonstrated to employ the PPI tool pro-actively to identify its market niche. 5.3 Portfolio Quality and Credit Risk ASHI portfolio quality stands at good and improving levels with PAR30 equals to 1.8% as of June 2011 and restructured loans worth 1%. However, due to the MIS shortcomings in the reporting flow between branches and HQs, some inaccuracies on the portfolio quality information cannot be ruled out. Specifically the portfolio aging is based on estimations. The restructured loans have been introduced after the typhoon Ondoy in 2009 which hit many ASHI s areas of operations. Clients at that time has accessed also to recovery loans, which facilitated the repayment flow to ASHI. The restructured loans (i.e. flexible loans) have nowadays been introduced as possible 27 Poverty incidence at national level (2009, National Statistics Bureau). MicroFinanza Rating 15

21 ASHI Philippines August 2011 Chapter 5 way to recover bad loans. The lack of a fully separated tracking system as well as dedicate provisioning represents an area for improvement. As shown in the table of portfolio breakdown by branches, urban areas (Metro Manila and some areas in Rizal) are the most exposed in terms of PAR. The joint liability in urban areas is often undermined by clients migration in the districts and certain volatility in the membership. The overall portfolio quality has been satisfactory overtime, also given a moderate growth which posed less stress on the systems and processes. 75% of PAR is concentrated in the oldest aging category (>180 days) and related, for the majority, to loans released in the past years. Nevertheless, the PAR distribution among aging category shows inaccuracies The loan loss provisioning policy has been modified in 2009 with a loan loss reserve increased up to 3% of the total outstanding portfolio. Although not reflecting the PAR, the loan loss reserve seems to adequately cover the capital against potential loan losses. However, it is worth mentioning that the PAR level and its aging need to be confirmed through an accurate portfolio audit. 5.4 Credit Policies and Procedures and management of lending activities The client repayment capacity analysis does not adequately mitigate the credit risk in the context of high competition and multiple borrowings. The analysis of credits is not modulated by loan amount, while the credit scoring system used is more based on development officers discretion rather than on client business cash flow. Within this perspective, the lack of complete and formalized credit policies hampers the overall uniformity of the practices in the branches, both in terms of loan recovery and monitoring pre and post loan disbursements. Monitoring conducted by Grameen Operations Director and area officers can be better optimized and standardized in order to align processes with intended strategy and targets. MicroFinanza Rating 16

22 ASHI Philippines August 2011 Chapter 6 6. Financial Structure and Management 6.1 Equity and Solvency Risk ASHI s capitalization is acceptable given the size and the company risk profile. As of June 2011, the Equity to Assets ratio stands at 26.05%, decreasing from 34% and 28% in 2008 and 2010 respectively. With the anticipated portfolio and clients growth, the capital base would require to expand either in the form of capital injections or better optimization of the assets productivity. The current level of indebtedness in our opinion is reasonable for a MFI NGO, while a further leverage would call for a better definition of the legal status (or a strengthening of the current legal framework environment for MFI NGOs) and a consolidation of the institution s top management (see 2.2). 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 Liabilities and Equity (USD) Other liabilities Other funds (insurance and TPP) Long term liabilities Short term liabilities Compulsory savings 2,000,000 - Dec08 Dec09 Dec10 Jun11 Deposits Equity The equity has increased through the capitalization of the retained earnings and, to a lesser extent, through the donated equity. In the period July 2010 June 2011, 16% of total equity is represented by the net income registered in the same period, confirming a positive trend overtime. The reserves include income from clients, which in the past years was recognized as donated equity (Salamat up-front fee). Equity (USD) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 Net income, current year Net income, previous years Reserves Donated equity 500,000 - Dec08 Dec09 Dec10 Jun Liabilities and Concentration Risk The funding needs are covered in the short term. ASHI s sources of funding show some concentration with People s Credit Finance Corporation (PCFC) which accounts for 73% of the total borrowings as of June However, the funding strategy is adequate and it is based on the consolidation of the relations with some of the current lenders and on the diversification with new international microfinance investors (ResponsAbility and Grameen Credit Agricole). The institution s funding structure is characterized by commercial rates ranging MicroFinanza Rating 17

23 ASHI Philippines August 2011 Chapter 7 between 7% and 11% and by a cost of funds equal to 8.7% as of June 2011, decreasing over the last three years. 12% of the total borrowings is denominated in hard currency. 43% of liabilities have a residual maturity over 1 year (56% of total borrowings) as of June 2011, maintaining a similar composition over the last 3 years. 11.3% of liabilities is represented by deposits (8% are compulsory deposits), which are prudentially kept liquid by ASHI. The ratio liquid assets/deposit has been always greater than 100%, showing a very marginal financial intermediation. 70% of the deposits are compulsory, linked to the weekly centre collections; the proportion between voluntary savings (see Annex 5) and compulsory savings remained unchanged over the last four years. Other funds, accounting for 12% of total liabilities, are constituted by the loan insurance funds, other insurances 28 and TPP (see 5.1) funds collected through different premium and/or specific products from ASHI clients. Part of these funds are reflected into the high level of liquidity; the financial leverage is therefore not fully optimized as the there is a significant level of resources which does not contribute to generate income. Furthermore, the in-house insurance programme has shown in the past some negative fluctuations in the claims over liquidity, jeopardizing the sustainability of the program. Considering that, ASHI has gradually shifted to a partner-agent insurance model. 6.3 Assets and Liabilities Management (Liquidity Risk and Market Risk) The assets and liabilities management shows some room for improvement along with the current network, the strengthening (and more complex) borrowings structure and the management of other financial services such as insurance. The Head of Finance is the responsible for liquidity management, which still relies on fragmented tools and sources of information, partly due to the quite high branch decentralization. An annual cash flow with a monthly break down is not currently prepared; the cash position per branch is updated on a monthly basis in order to identify the cash needs at branch level. Over the last three years, te liquidity over total assets stood at 23%, constituting a high level given ASHI size and the type of operations. This is partly due to the design of the TPP program and loan insurance fund, which does not optimize the resources use. Moreover, the good decision to reduce the cash handling by adopting ATM Card for releasing loans has to be evaluated also in light of the needed cash to be kept liquid, producing an important trade-off in terms of operation risk mitigation and assets productivity. 35% 30% 25% 20% 15% 10% 5% 0% Liquid assets/total assets The institution does not currently compile any maturity gap analysis and the data on portfolio breakdown by residual maturity cannot be extracted from the MIS, hampering the ALM analysis. However, ASHI is characterized by a relatively short term 28 Especially for clients beyond 65 years old, who are not covered by the insurance provided by MicroEnsure. MicroFinanza Rating 18

24 ASHI Philippines August 2011 Chapter 7 portfolio (with weekly frequency repayments) and by liabilities to be paid on a quarterly or upon maturity, contributing to the good liquidity position and the absence of negative mismatches. ASHI does not suffer from significant interest rate risk, as all liabilities and assets bear fixed interest rates and the asset and liabilities structure does not seem to show a relevant maturity mismatch. Being ASHI assets sensitive, a downward pressure on the portfolio yield would negatively impact the financial margins. With all the portfolio denominated in local currency and 24% of liabilities in foreign currency, the institution presents some open position, which is however marginal so far. In fact, ASHI keeps part of its funding in foreign currency accounts due to a moderate growth and the current availability of resources in local currency. However, the institution does not have any policy in place to mitigate the potential increase in the open position. MicroFinanza Rating 19

25 ASHI Philippines August 2011 Chapter 7 7. Financial and Operational Results 7.1 Profitability and Sustainability The financial performance analysis is based on the annual audited financial statements for the years 2008, 2009 and 2010, and partly on the internal financial statements for the period July 2010 June ASHI shows improving levels of profitability and sustainability with ROE and ROA respectively reaching 12.78% and 3.54% in the last period of analysis. It is worth mentioning that in the first semester 2011 the annualized operating costs grew at a slower pace than the whole 2010, positively affecting the profitability results. On the other hand, the operating costs are characterized by certain seasonality and are expected to increase at the end of the year. Similarly, the sustainability shows a similar trend with OSS passing from 109% in 2010 to 115% in June 2011 (y-o-y), along with a decrease in the operating costs and the funding expenses in the first semester of Considering the business model (i.e. low average loan size and weekly collections doorto-door) and the moderate assets productivity, the current level of profitability is acceptable. 15% 10% 5% 0% -5% -10% Profitability and Sustainability Dec08 Dec09 Dec10 Jun11 ROA (sx) AROA (sx) ROE (sx) AROE (sx) OSS (dx) FSS (dx) 140% 120% 100% 80% 60% 40% 20% 0% The adjusted results prove the full sustainability of ASHI in the last one year and half (see annex 2 for more details). In 2009 and 2008, the adjusted results were negative due to the large adjustment applied for inflationary pressure and to a minor extent to the insufficient loan loss provisioning (in particular in 2008). In the period April 2010 March 2011, FSS and AROA are worth % and 2.53% respectively, with an improvement compared to 2009 (98.27% and -0.44%). 7.2 Revenues and Expenses Structure and Margins On the revenues side, the portfolio yield has been quite stable over the periods of analysis with a slight increase in the first semester 2011 due to the diminishing average portfolio (along with a slower portfolio growth in that period). The slight fluctuations have not been affected by any changes in the interest rates, which have remained unchanged over the last years. On the costs side, the operating expenses ratio is slightly below 30% over the last period of analysis, reflecting ASHI business model and target population. Although the ratio is decreasing overtime, the weekly repayments collected on the clients premises coupled with a low average loan size entail relevant costs. After having dropped in 2010 along with a relevant increase in the number of DOs, the productivity is increasing (265 borrowers per loan officer as of June 2011). Considering the group lending methodology, the productivity levels show some room for improvement. In our opinion, reasons behind such a level are linked with a credit process not adequately streamlined yet. Besides, more flexible repayment conditions and stronger internal control systems may have a positive impact on the loan officer productivity. It is worth MicroFinanza Rating 20

26 ASHI Philippines August 2011 Chapter 7 mentioning that given the significant share of parallel loans, productivity officers per number of loans stands at 373 as of June of loan The funding expenses are decreasing along with a diminishing cost of funds, while the loan loss provisioning cost stands at a low level, equal to 0.7% in Jul10 Jun11. Overall, ASHI profitability levels remain good and likely to be aligned with 2010 performances. ASHI future results are linked with the achievement of targets which remain one of the main concerns due to competition that foresee a significant scaling up. In our opinion the targets may be achieved if the MIS, the credit process and the internal control and risk management are promptly addressed in order to effectively support the growth. 7.3 Responsible financial performance ASHI financial performance is generally responsible considering the moderate growth, the fair profitability and the attention paid to the clients selection and the service variety. On the other hand, the cost charged to the clients, which has not been decreasing over the last years, partly reflects some systems inefficiencies and process bottlenecks. MicroFinanza Rating 21

27 ASHI Philippines August 2011 Annex 1 Annex 1 Financial Statements MicroFinanza Rating 22

28 ASHI Philippines August 2011 Annex 1 MicroFinanza Rating 23

29 ASHI Philippines August 2011 Annex 2 Annex 2 Financial Statements Adjustments The financial statements in Annex 1 are the result of standard reclassification and they are based on the annual audited financial statements. As for the infra-annual periods the internal financial statements are used. Financial statements have been adjusted in order to make them comparable to financial reporting and performances of institutions using different accounting standards and operating in different environment and to evaluate the level of sustainability of the institution with market conditions. The main adjustments include: Accrued interest on delinquent loans > 90 days. Subsidies: donations in kind 29 and soft loans 30 ). Provisions (calculated with a standard formula 31 ). Inflation. 29 Donations in kind are valorized and added to operational expenses. 30 In the income statement it is registered the value of the difference between financial costs of the institutions and financial cost evaluated at the market rate. In particular, in the case of loans in local currency, it is considered 75% of the average lending rate in the national market (IFS Line 60P). In the case of loans denominated in foreign currencies (US$ and Euro), it is considered the average value of LIBOR 1 year plus 3%. 31 Provisions are calculated according to the following formula: Portfolio at risk: 1-30 days 10% Restructured loans 0-30 days 50% days 30% > 30 days 100% days 50% >90 days 100% MicroFinanza Rating 24

30 ASHI Philippines August 2011 Annex 3 Annex 3 Indicators MicroFinanza Rating 25

31 ASHI Philippines August 2011 Annex 4 Annex 4 Definitions Description of the ratio Formula Profitability Return on Equity (ROE) Adjusted Return on Equity (AROE) Return on Assets (ROA) Adjusted Return on Assets (AROA) Operational Self-sufficiency (OSS) Net income before donations / Average equity Adjusted net income before donations / Average equity Net income before donations / Average assets Adjusted net income before donations / Average assets (Financial revenue + Other operating revenue) / (Financial expenses + Provision expenses + Operating expenses) Financial Self-sufficiency (FSS) (Adjusted financial revenue + Other operating revenue) / (Adjusted financial expenses + Adjusted loan loss provision expenses + Adjusted operating expenses) Profit Margin Net operating income / operating revenue Portfolio Quality Efficiency and Productivity Financial Management Outreach Portfolio at Risk (PAR30) Provision Expense Ratio Loan Loss Reserve Ratio Risk Coverage Ratio (>30 days) Write-off Ratio Staff Allocation Ratio Loan Officer Productivity Borrowers Loan Officer Productivity Amount Staff Productivity Borrowers Staff Productivity Amount Operating Expenses Ratio Cost per Borrower Administrative Expenses Ratio Personnel Expenses Ratio Portfolio Yield Funding Expense Ratio Cost of Funds Ratio Current Ratio Debt/Equity Ratio Capital Adequacy Ratio Average Disbursed Loan Size Average Disbursed Loan Size Per-C. GDP Portfolio at Risk > 30/ Gross outstanding portfolio Loan loss provision expenses / Average gross portfolio Accumulated reserve / Gross portfolio Accumulated reserve / Portfolio at risk >30 days Write-off of loans / Average gross portfolio Loan officers / Total staff Number of active borrowers / Number of loan officer Gross portfolio / Number of loan officer Number of active borrowers/ Number of staff Gross portfolio / Number of staff Operating expenses / Average gross portfolio Operating expenses / Average number of borrowers Administrative expenses / Average gross portfolio Personnel expenses / Average gross portfolio Interest income from portfolio / Average gross portfolio Interests and fee expenses on funding liabilities / Average gross portfolio Interest expenses on funding liabilities / Average funding liabilities Short term assets / Short term liabilities Total liabilities / Equity Total equity / Total assets Amount issued in the period / Number of issued loans Average disbursed loan size / Per-capita GDP Other Definitions: Funding Liability: Liability that finance the loan portfolio and the cash investments necessary to manage the loan portfolio Operating Expenses: Personnel expenses + Administrative expenses Recovery from Write-off Ratio: Income from write-off (payments received from loan already written-off) / Average gross portfolio Restructuring of Delinquent Loans: includes rescheduling loans (extending the term of the loan or relaxing the schedule of required payments) and refinancing loans (paying off a problem loan by issuing a new loan). Drop-out Ratio: calculated as follows: (number of active clients at the beginning of the period + number of new (first time) clients entering during the period clients written off during the period number of active clients at the end of the period) / (number of active clients at the beginning of the period). MicroFinanza Rating 26

32 ASHI Philippines August 2011 Annex 5 Annex 5 Financial Products MicroFinanza Rating 27

33 ASHI Philippines August 2011 Annex 6 Annex 6 Rating Scale The final rating grade does not consider the Country Sovereign Rating Risk, but it takes into account the effects of the political and economic context on MFI s performance. The information used in the current rating has been partly provided by the institution subject to the evaluation process and partly collected during the meetings with the head executives. The analysis is based on audited financial statements and other official sources. MicroFinanza Rating cannot guarantee the reliability and integrity of the information, as it does not conduct auditing exercises, and therefore does not bear responsibility for any mistake or omission coming from the use of such information. The rating has to be considered as an external and independent opinion and it has not to be considered as a recommendation to realize investments in a specific institution.